Question 1

Explain why many industrialized countries do not often intervene in the foreign exchange market.

Accepted Answer

As Chapter 10 pointed out with the lesso

Question 2

The empirical evidence on purchasing power parity seems to point out that:

Accepted Answer

A) purchasing power parity can explain long run movements in exchange rates but does not hold up to scrutiny for short-run changes. 
B) purchasing power parity does a good job of explaining short-run movements in exchange rates, but does not hold up to scrutiny over the long run. 
C) purchasing power parity is a good theory for international trade, but is of little use in explaining exchange rate movements. 
D) inflation and a country's rate of currency appreciation are positively correlated. 
A) purchasing power parity can explain long run movements in exchange rates but does not hold up to scrutiny for short-run changes. 
B) purchasing power parity does a good job of explaining short-run movements in exchange rates, but does not hold up to scrutiny over the long run. 
C) purchasing power parity is a good theory for international trade, but is of little use in explaining exchange rate movements. 
D) inflation and a country's rate of currency appreciation are positively correlated.

Question 3

If the Federal Reserve in the United States begins to purchase foreign currency and pay for these purchases with dollars, this should cause:

Accepted Answer

A) the dollar to appreciate. 
B) the dollar to depreciate. 
C) import prices to decrease. 
D) exports to decrease. 
A) the dollar to appreciate. 
B) the dollar to depreciate. 
C) import prices to decrease. 
D) exports to decrease.

Question 4

In the foreign exchange market, the demand for U.S.dollars is made up from:

Accepted Answer

A) foreigners desiring to purchase U.S.goods, services, and assets. 
B) Americans who want to hold more currency. 
C) Americans wishing to purchase foreign goods, services, and assets. 
D) Americans who want to invest in foreign assets. 
A) foreigners desiring to purchase U.S.goods, services, and assets. 
B) Americans who want to hold more currency. 
C) Americans wishing to purchase foreign goods, services, and assets. 
D) Americans who want to invest in foreign assets.

Question 5

A country that has a capital account surplus:

Accepted Answer

A) is a net seller of assets. 
B) has a current account surplus. 
C) is a net buyer of assets. 
D) will see its currency remain steady. 
A) is a net seller of assets. 
B) has a current account surplus. 
C) is a net buyer of assets. 
D) will see its currency remain steady.

Question 6

Depreciation of the real exchange rate:

Accepted Answer

A) makes U.S.exports more expensive to foreigners. 
B) makes U.S.exports less expensive to foreigners. 
C) means a basket of U.S.goods would exchange for more foreign goods. 
D) means an appreciation of the nominal exchange rate. 
A) makes U.S.exports more expensive to foreigners. 
B) makes U.S.exports less expensive to foreigners. 
C) means a basket of U.S.goods would exchange for more foreign goods. 
D) means an appreciation of the nominal exchange rate.

Question 7

The government of a country that is experiencing strong currency appreciation might find itself under pressure from some of its own citizens.Who would be likely to be bringing pressure and why?

Accepted Answer

A country experiencing strong currency a

Question 8

Which of the following provides a strong incentive to supply dollars on the foreign exchange market?

Accepted Answer

A) To purchase goods and services produced abroad 
B) To get a lower return paid on foreign currencies that is not subject to the risk associated with exchange-rate fluctuations 
C) To invest in U.S.assets 
D) To take advantage of higher inflation rates in other countries 
A) To purchase goods and services produced abroad 
B) To get a lower return paid on foreign currencies that is not subject to the risk associated with exchange-rate fluctuations 
C) To invest in U.S.assets 
D) To take advantage of higher inflation rates in other countries

Question 9

Explain why the changes we observe in nominal exchange rates in the short run must be due primarily to changes in the real exchange rate in countries with low inflation.

Accepted Answer

In the short run prices do not move that

Question 10

Considering the euro/U.S.dollar exchange rate, as a U.S.dollar decreases in value versus the euro (holding other factors constant):

Accepted Answer

A) this is represented by a downward movement along the supply of dollars curve. 
B) this would be represented by an upward sloping demand for dollars curve. 
C) this would be represented by a leftward shift of the supply of dollars curve. 
D) this is represented by an upward movement along the demand for dollars curve. 
A) this is represented by a downward movement along the supply of dollars curve. 
B) this would be represented by an upward sloping demand for dollars curve. 
C) this would be represented by a leftward shift of the supply of dollars curve. 
D) this is represented by an upward movement along the demand for dollars curve.

Question 11

The nominal exchange rate:

Accepted Answer

A) is the amount of one country's goods that could be obtained with a basket of goods of another country. 
B) is always expressed as units of a foreign currency per U.S.dollar. 
C) is the rate that one can exchange the currency of one country for the currency of another country. 
D) is a synonymous term for the swap rate. 
A) is the amount of one country's goods that could be obtained with a basket of goods of another country. 
B) is always expressed as units of a foreign currency per U.S.dollar. 
C) is the rate that one can exchange the currency of one country for the currency of another country. 
D) is a synonymous term for the swap rate.

Question 12

Considering the foreign exchange market, identify at least four causes for a decrease in the demand for dollars.

Accepted Answer

The demand for dollars on the foreign ex

Question 13

Explain why the law of one price may best be applied to financial assets.

Accepted Answer

Financial assets, for example shares of

Question 14

An increase in the real interest rate on U.S.bonds, everything else equal, will have the following impact on the foreign exchange market:

Accepted Answer

A) the demand for dollars will increase. 
B) the supply of dollars will increase. 
C) the dollar will depreciate relative to foreign currencies. 
D) there will be a movement up the existing demand for dollars curve. 
A) the demand for dollars will increase. 
B) the supply of dollars will increase. 
C) the dollar will depreciate relative to foreign currencies. 
D) there will be a movement up the existing demand for dollars curve.

Question 15

Assume that currently one U.S.dollar will purchase £0.65.Investors believe that one year from now a U.S.dollar will purchase £0.72.If we consider the U.S.dollar-pound market, where the horizontal axis measure the quantity of pounds, explain what we are likely to see in terms of demand and supply and the exchange rate.

Accepted Answer

In this case, investors expect a deterio

Question 16

Assuming the law of one price, explain what the exchange rate between U.S.dollars and yen has to be if the price of steel in Japan is 15,000 yen per ton and the price in the U.S.is $125 per ton (assume no transaction costs).

Accepted Answer

Given the price for steel in each countr

Question 17

The theory of purchasing power parity:

Accepted Answer

A) contradicts the law of one price. 
B) explains exchange rate movements in the short run, while the law of one price explains exchange rate movements over the long run. 
C) assumes away inflation to have any validity. 
D) extends the law of one price to a basket of goods. 
A) contradicts the law of one price. 
B) explains exchange rate movements in the short run, while the law of one price explains exchange rate movements over the long run. 
C) assumes away inflation to have any validity. 
D) extends the law of one price to a basket of goods.

Question 18

Which of the following statements is most correct?

Accepted Answer

A) If the U.S.$ depreciates relative to the yen, then it is likely also depreciating relative to the euro. 
B) If the U.S.$ is appreciating relative to the euro, the euro is likely depreciating relative to the yen. 
C) If the U.S.$ is depreciating relative to the euro it is likely depreciating relative to all currencies. 
D) If the U.S.$ is appreciating relative to the yen, the yen is depreciating relative to the U.S.$. 
A) If the U.S.$ depreciates relative to the yen, then it is likely also depreciating relative to the euro. 
B) If the U.S.$ is appreciating relative to the euro, the euro is likely depreciating relative to the yen. 
C) If the U.S.$ is depreciating relative to the euro it is likely depreciating relative to all currencies. 
D) If the U.S.$ is appreciating relative to the yen, the yen is depreciating relative to the U.S.$.

Question 19

If a Japanese Toyota sells for 2,500,000 yen and the nominal exchange rate is 110 yen/$U.S., then the dollar price of the Japanese automobile is:

Accepted Answer

A) 22,727 yen. 
B) $20,000. 
C) $25,000. 
D) $22,727. 
A) 22,727 yen. 
B) $20,000. 
C) $25,000. 
D) $22,727.

Question 20

A country that has a capital account deficit:

Accepted Answer

A) is a net seller of assets. 
B) is importing more goods and services than it exports. 
C) also has a current account deficit. 
D) is a net buyer of assets. 
A) is a net seller of assets. 
B) is importing more goods and services than it exports. 
C) also has a current account deficit. 
D) is a net buyer of assets.

Exam 10: Foreign Exchange

Explain why many industrialized countries do not often intervene in the foreign exchange market.

The empirical evidence on purchasing power parity seems to point out that:

If the Federal Reserve in the United States begins to purchase foreign currency and pay for these purchases with dollars, this should cause:

In the foreign exchange market, the demand for U.S.dollars is made up from:

A country that has a capital account surplus:

Depreciation of the real exchange rate:

The government of a country that is experiencing strong currency appreciation might find itself under pressure from some of its own citizens.Who would be likely to be bringing pressure and why?

Which of the following provides a strong incentive to supply dollars on the foreign exchange market?

Explain why the changes we observe in nominal exchange rates in the short run must be due primarily to changes in the real exchange rate in countries with low inflation.

Considering the euro/U.S.dollar exchange rate, as a U.S.dollar decreases in value versus the euro (holding other factors constant):

The nominal exchange rate:

Considering the foreign exchange market, identify at least four causes for a decrease in the demand for dollars.

Explain why the law of one price may best be applied to financial assets.

An increase in the real interest rate on U.S.bonds, everything else equal, will have the following impact on the foreign exchange market:

Assuming the law of one price, explain what the exchange rate between U.S.dollars and yen has to be if the price of steel in Japan is 15,000 yen per ton and the price in the U.S.is $125 per ton (assume no transaction costs).

The theory of purchasing power parity:

Which of the following statements is most correct?

If a Japanese Toyota sells for 2,500,000 yen and the nominal exchange rate is 110 yen/$U.S., then the dollar price of the Japanese automobile is:

A country that has a capital account deficit:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value, and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets, and Market Efficiency

Derivatives: Futures, Options, and Swaps

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange-Rate Policy and the Central Bank

Money Growth, Money Demand, and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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